Sebi issues show-cause notices to brokerages on NSEL scam

MUMBAI: Capital markets regulator Sebi has begun issuing show-cause notices to five leading brokerages — Anand Rathi Commodities, IIFL Commodities, Motilal Oswal Commodities, Geofin Comtrade and Phillip Commodities India — as to why action should not be recommended against them for mis-selling and misrepresentation to clients and client code modification (by a few), among others, in the Rs 5,600-crore NSEL payment crisis of July 2013.

Spokespersons from Geofin Comtrade and Anand Rathi Commodities orally confirmed having received the show-cause notices (SCNs), while queries to the other three remained unanswered till the time of going to press.

A Sebi official was not immediately available for comment. The brokers will be given the customary three weeks to respond to the notice, following which they will get a personal hearing by Sebi. The regulator can then issue interim orders against them, if it sees fit.

A three-member designated authority comprising Suresh Menon, D Sura Reddy and Rachna Anand was appointed by Sebi last month to issue the SCNs under Sebi (Intermediaries) Regulations, 2008 against the five after an investigation into their alleged role in the Rs 5,600-crore scam on NSEL that surfaced in July 2013. The regulation deals with registration of brokers under the Sebi Act.

Though the brokers ET spoke with didn’t comment on the SCNs’ content, multiple sources aware of the same said the designated authorities queried why the brokers did not run their due diligence “knowing well” that the contracts offered on the exchange were in violation of the then extant regulations. “Why some engaged in client code modifications and why they financed clients (through NBFCs) to trade the contracts were the subject matter of the SCNs,” said one of the sources.

The government-licensed NSEL to function as an electronic spot exchange is subject to six conditions, key of which were that it should not offer forward trades and not permit short sales.

NSEL violated both these conditions which caused the Ministry of Consumer Affairs to direct it not to launch fresh contracts in July 2013, months after issuing a show cause notice to it.

This caused the bubble to burst as the exchange failed to ensure that 24 counterparties had the collateral against Rs 5,600 crore they raised from 13,000 investors.

Clients who traded on NSEL through the five brokers had an exposure of roughly Rs 1,600 crore at the time of the scam.